Here is a belief we correct more often than almost any other, usually a few weeks after a closing, usually with a client who is already mentally spending the deduction:
"I bought a new building, so I get a fresh 27.5-year depreciation schedule on the whole thing."
You do not. And the reason is the same reason the exchange saved you money in the first place, which makes it easier to accept once you see the logic.
Why depreciation cannot reset
A 1031 exchange does not forgive your gain, it defers it. The mechanism for that deferral is basis: your old adjusted basis follows you into the replacement property rather than being marked up to what you paid.
If depreciation restarted on the full purchase price, you would be depreciating value you never paid tax on. You would get the deferral and a fresh set of deductions on the same dollars. The tax code declines to hand you both.
So instead of one schedule, you end up with two.
The two pieces
Carryover basis. This is the adjusted basis from the property you gave up: original cost, plus capital improvements, minus all depreciation already taken. It continues depreciating on its existing schedule. It does not restart. If you were eleven years into a 27.5-year schedule, you continue from year eleven. (If the replacement has a longer depreciable life than the relinquished property, that carryover portion extends to the longer life, but it still runs from the original schedule rather than beginning again.)
Excess basis. This is the genuinely new money: the additional cash and debt you put into the replacement above the value of what you relinquished. That portion is treated as a new asset, depreciated over the recovery period appropriate to the replacement property, using the normal method and convention.
| Carryover basis | Excess basis | |
|---|---|---|
| What it is | Adjusted basis from the old property | New cash and debt added |
| Depreciation | Continues the old schedule | Starts fresh |
| Restarts at 27.5 or 39 years? | No | Yes |
| Eligible for bonus depreciation? | No | Yes |
| Eligible for cost segregation? | Limited | Yes |
The consequence people care about most
That last row is where real money sits. Only excess basis qualifies for bonus depreciation. The carryover portion does not, because it represents deferred gain rather than new investment.
The same logic drives cost segregation after an exchange. A study can front-load deductions, but the meaningful acceleration is available on the excess basis, not on the carried-over portion still running its old schedule. This is precisely why we say a cost seg study after an exchange is more complicated than one after a straight purchase, and why a study that treats the whole building as newly acquired will overstate your deductions.
Practically, this means an exchanger who trades up substantially creates a large slice of new basis and unlocks real acceleration. One who trades roughly even generates very little excess basis and should not expect a wave of new deductions.
What this changes about planning
- Model the deduction before you close, not after. If part of the case for a replacement property is the depreciation, size the excess basis first. Trading even means trading even on deductions too.
- Bring the old schedule with you. Your CPA needs the relinquished property's depreciation history to set the carryover piece correctly. Ask for it at closing, along with the rest of the exchange file we describe in reporting on Form 8824.
- Remember what is accumulating. Every year of depreciation, on either schedule, adds to the recapture waiting at sale, unless you keep exchanging or hold to a step-up at death.
- There is an election to simplify, treating the whole basis as newly placed in service, but it is generally less favorable and is a decision for your CPA rather than a default.
None of this is a reason to avoid exchanging. Deferral is worth far more than a reset schedule would have been. It is a reason to be accurate about what the replacement property will actually produce in deductions, because the gap between "fresh 27.5-year schedule on $3,000,000" and the real answer is large enough to change how a deal looks. Your CPA determines the correct treatment for your specific exchange, and coordinating that handoff is the closing step of our exchange process.
Questions we field about depreciation after an exchange
Does depreciation restart after a 1031 exchange?
Not on the whole property. The carryover basis continues on its existing schedule, and only the excess basis, the new money you added, begins a fresh schedule over the replacement property's recovery period.
What is excess basis?
The additional cash and debt you invested in the replacement property above the value of the property you relinquished. It is treated as a new asset for depreciation purposes.
Can I take bonus depreciation after an exchange?
Only on the excess basis. The carryover basis does not qualify, because it represents deferred gain rather than new investment.
Is cost segregation still worth doing?
Often yes, but the meaningful acceleration applies to the excess basis. A study should account for both layers rather than treating the entire building as newly purchased.
What records does my CPA need?
The relinquished property's depreciation schedule and adjusted basis, both closing statements, and the intermediary's exchange documents. Request them at closing while everything is still at hand.